The Australian central bank is sounding a warning on the US-China trade war as it prepares for a possible rate cut.

By David Walker

Posted on May 21, 2019

As tensions rise between the US and China, Australia’s central bank governor has pointed out that world trade is now in reverse, and argued for a quick resolution of US-China trade disputes.

The governor, Philip Lowe, has also flagged that the Reserve Bank of Australia will be very open to the idea of cutting the official rate from its current 1.5% when it meets in June.

A lower rate “would support employment growth and bring forward the time when inflation is consistent with the target,” Lowe said in the text of the Brisbane speech.

The Reserve targets an inflation rate of 2–3%, but expects inflation for 2019 to be around 1.75%.

The cut, almost certainly to 1.25%, would be Australia’s first official rate cut in almost three years.

Bloomberg reported that in the question session after the speech, Lowe called it “fair enough” to say the central bank had shifted to an easing bias.

In the speech on Tuesday 21 May, Lowe said the big uncertainty in the world economy was trade policy. That was a clear if not explicit reference to the rising tensions between the US and China over issues such as tariffs and Chinese use of US intellectual property.

“Over the past year, global trade has not grown at all,” he said, pointing to a graph that showed growth turning negative this year. That was unusual as, historically, global trade has tended to increase at least as fast as the GDP. And though it was partly due to a slower Chinese economy, “increases in US and Chinese tariffs are also a factor”. The tariff rises had caused weaker growth in manufacturing around the world, disrupted supply chains, and delayed investment decisions.

The RBA maintains good contacts with China’s central bank, so its insights into the Chinese economy carry weight.

Lowe said that fixing the current disputes would help boost trade flows, reduce business uncertainty and push up investment.

“On the other hand, a failure to resolve the disputes represents a major downside risk to the global economy. So there is a lot riding on this issue.”

Lowe nevertheless described the global economy as “quite resilient”. The term ‘resilience’ – a system’s ability to recover after a shock – has in recent years found its way from ecology to economics as a way to describe how well economies survive in harder times.

Lowe also said the Reserve remained puzzled by the mystery of low inflation, though he thought it was linked to technology, globalisation and perceptions of strong competition. But he thought unemployment could go lower without pushing inflation much higher.

He also said the Reserve still expected the Australian economy to grow by 2.75% over both 2019 and 2020 – although as usual, he was careful to note the uncertainty and wide range of possible figures for growth.